Is there any business in the world wherein you can make money even during the recession? Yes, you can do so by trading in share, commodity, and currency.
In the year 2008, when the whole world was dealing with the economic crisis, there was one such legend who by trading bearish in the share market even during the recession made around $ 4 million. His name is John Paulson. Paulson became world-famous in 2007 by shorting the US housing market, as he foresaw the subprime mortgage crisis and bet against mortgage-backed securities by investing in credit default swaps.
Sometimes referred to as the greatest trade in history, Paulsonʹs firm made a fortune and he earned over $4 billion personally on this trade alone. Also, there is a book published on this technique titled ‘The Greatest Trade Ever’. Till date, it was the best recession trade that ever happened. So if you wish to make money in the recession, then it is possible using the method of Short-Sell.
Let’s understand Short sell using a simple example. Consider I am the seller of mangoes. The box of mangoes costed Rs.200 yesterday, today it has fallen down to Rs.150. As the price has decreased, you think that you are getting the box at a cheaper rate so, you come to me and ask for the box of mangoes. I agree to sell it to you when in reality, I don’t have the box with me currently. Being a businessman, I knew that the price of the mangoes will fall further from Rs.150 to Rs.100. I lied to you saying that I have the box of mangoes with me and promise to give you the box in an hour. So you paid me Rs.150 and left.
Now, I go to the market and wait for the rate to fall further. Within an hour, the price of the box of mangoes falls from Rs.150 to Rs.100. So out of the Rs.150 that you had given me, I paid Rs.100; bought the box of mangoes and gave it to you. Now, I have the extra Rs.50 with me, which means even when the prices were falling I still made a profit/ money despite the recession. This is known as Short-Sell.
In another case, if instead of the price falling down, it had gone up from Rs.150 to Rs. 180 then? At that point in time, I would have required to give the extra Rs.30 from my pocket in-order to buy those mangoes to give it to you. So here, I would’ve been at a loss of Rs.30.
This means if I trade bearish during the recession and if the prices fall down then I book a profit there whereas, if the prices go up then I have to suffer a loss.
So if I can do this trade with a box of mangoes, similarly can I also do this at the share market? Yes. If in the share market, we carry-out a short-sell trade in the cash market then we are required to settle that trade on the same day in the cash market and if we carry out the short-sell trade in Future & Options then we get time till the expiry of the contract.
Thus, remember to settle the short-sell trade on the same day if you are trading in the cash market. Until next time…
Happy Trading, Happy Investing!!!
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